Will Voltas Diversified Business Strategy Drive Future Growth?

The consumer durable and electronics sector is banking on 2024 to achieve a significant increase in revenue, despite facing several challenges such as unusual summer rains, subdued consumer confidence due to inflation, and delayed clearance of non-rated fan inventory. 

These obstacles are now seemingly in the past. Brands anticipate growth from various markets in 2024, with premium, value-added, feature-driven products continuing to be significant drivers. 

Consumer durable companies benefit from GDP multiplier advantages and provide opportunities for medium to long-term growth, supported by resilient trends in housing and home improvement, low market penetration in many product categories, and chances for diversification in their product offerings.

Voltas, a leading residential air conditioner manufacturer, announced a remarkable 35% sales growth, surpassing two million units in FY24, making it the first company in the domestic market to achieve this milestone. 

This achievement led to a surge in Voltas’ shares by 13% on Monday, reaching a 52-week high of Rs 1,392 on the NSE. Over the past year, Voltas has delivered impressive returns of over 60%, outperforming the Nifty, which returned 29% during the same period.

Given the optimism in the consumer durable and electronics industry, one might wonder if it’s the right time to buy Voltas’ shares. Let’s delve deeper to find out.

Corporate Overview Of Voltas

As an integral member of the Tata Group, Voltas has established itself as a leader in India in cooling products, and prides itself on being the country’s No.1 Room Air Conditioner brand.

Moreover, the Company has a diversified footprint in other business domains, including Engineering Products and Electromechanical Projects and Services.

The Company has maintained its market leadership over the years by consistently delivering high-quality products to its customers. Voltas maintains its market positioning in India and in the MENA region.

Business Segments Of Voltas

The company has three main segments – Unitary Cooling Products, Electro – Mechanical Projects and Services, Engineering Products and Services. 

The Unitary Cooling Products segment remains the most revenue generating business contributing 68% to the overall sales. 

Unitary Cooling Products

Unitary Cooling Products (UCP) serves a wide array of customers through its comprehensive range of integrated solutions, catering to both business-to-consumer (B2C) and business-to-business (B2B) segments.

Voltas’ products are tailored to meet the needs of both residential and commercial spaces, offering energy-efficient solutions, advanced features, and robust durability.

Additionally, the company prudently manages its component inventory, ensuring the timely delivery of high-quality products. This commitment to excellence in product delivery remains a key driver of its ongoing growth.

Voltas Beko

Since its introduction, Voltas Beko, recognized as one of India’s fastest-growing home appliance brands, has achieved sales exceeding 3.3 million units. 

Voltas Beko offers a wide range of technologically advanced appliances including refrigerators, washing machines, microwaves, dishwashers, and more, characterized by exclusive designs crafted from premium materials. Voltas Beko is actively broadening its footprint in India with plans to target 15,000 outlets.

International Operations Business Group

IOBG specializes in offering comprehensive electromechanical solutions and services to clients across the Middle East and Asia regions. The company is dedicated to seizing strategic business prospects in global markets and delivering high-quality electromechanical solutions and services beyond India.

Furthermore, IOBG has achieved success in executing numerous projects throughout the Gulf Cooperation Council (GCC) countries, including Dubai, Oman, Qatar, Bahrain, and others.

Infrastructure Solutions

Voltas, through its wholly-owned subsidiary UMPESL, provides a comprehensive array of services to various infrastructure sectors, including building construction, airports, ports, power, and water treatment.

The company offers integrated MEP (Mechanical, Electrical, and Plumbing) solutions that encompass the entire spectrum of design, engineering, procurement, construction, and commissioning of these systems.

Textile Machinery Division

TMD specializes in providing engineering products and services tailored to the textile industry. Through its Principals, TMD offers an extensive range of machinery and equipment including spinning, weaving, knitting, processing, and finishing machinery. 

These offerings are further complemented by excellent after-sales support and maintenance services, ensuring the smooth operation and longevity of the equipment for its clients in the textile sector.

Mining and Construction Equipment (M&CE)

In 1954, Voltas founded the M&CE division as the Earthmoving, Mining & Agricultural (EMA) machinery division. Over the years, M&CE has significantly expanded its business operations across India and extended its presence to Mozambique through collaborations with Tata Mozambique and Tata Africa.

The primary focus of the company remains on catering to mining companies, and it proudly identifies itself as an engineering solutions provider in this sector.

Financials Of Voltas

In the fiscal year 2023, Voltas saw an increase in revenue, surging by 20% to reach ₹9,498.77 crore as opposed to ₹7,934.45 crore in FY2022. Analyzing a span of four years, encompassing FY2020 to FY2023, the company displayed a  Compound Annual Growth Rate (CAGR) of 7% in revenue.

On the other hand, there was a substantial downturn in net profit, experiencing a 73% decrease from ₹506 crore in FY2022 to ₹136.22 crore in FY2023. 

The RAC (Room Air Conditioner) business faced intense competition and pricing pressure from aggressive competitors, resulting in squeezed margins.

Moreover, delays in certifications and payment releases in the Projects segment prompted the company to create provisions on receivables in accordance with its cautious policy. Consequently, this impacted profitability.

As a result, Voltas’s return ratios dropped significantly. In FY2023, the company maintained a Return on Equity (ROE) of 4.46% and Return on Capital Employed (ROCE) of 9.54%.

Future Plans Of Voltas

EMPS: One-offs drag performance; recovery expected

The MEP segment serves industrial clients in the GCC region as well as domestic markets, offering services such as water management and electromechanical projects. 

Recently, the company underwent internal restructuring and consolidated its domestic projects business, including MEP, infrastructure, textile machinery, and construction equipment, into a wholly-owned subsidiary named Universal MEP Projects & Engineering Services Ltd.

Management clarified that the restructuring aimed to focus separately on the B2B and B2C business segments.

VOLT currently holds an order book worth ₹8,000 crore, comprising ₹5,500 crore of international orders and ₹3,500 crore of domestic orders in this segment. However, the segment’s performance in FY23/1QFY24 was adversely affected by write-offs in the international business.

Delays in certification and collection of outstanding amounts led to the creation of provisions. Management assured that efforts are underway to engage with customers and expedite certification processes to address these challenges. 

Lower Sales Promotion Expenses than Peers

VOLT maintains industry-leading margins in the UCP segment by keeping its advertising and sales promotion expenses significantly lower than its peers.

In FY23, VOLT’s advertising expenditure as a percentage of revenue was 0.7%, compared to 0.9% for Blue Star and 2.6% for Havells. When considering UCP revenue specifically, VOLT’s advertising expenditure as a percentage stood at 1%, notably lower than Blue Star’s 2.7%.

It’s worth noting that Lloyds allocates a larger portion of its revenue, approximately 5%, to advertising expenses. Similarly, VOLT’s sales promotion expenses, including commission on sales, were at 0.1%, considerably lower than Blue Star’s 0.9% and Havells’ 0.7% in FY23.

The company’s ability to maintain lower advertising expenditures has consistently contributed to its superior margins compared to peers. For instance, while Lloyds experienced a loss at the EBIT level in FY23, Blue Star’s EBIT margin in the UCP segment was 7.8%, slightly lower than VOLT’s impressive margin of 8.3%.

Conclusion

So, when looking at the valuations, the company is expensive as compared to the peers in the industry as is evident from the Price to Earnings of  155 although Price to book value ratio is at 7.63 compared to 12.2 for Blue star. It also holds a dividend yield of 0.32 percent.

With its strong market presence and strategic initiatives, Voltas aims to maintain its competitive edge. However, the question remains: what do you think lies ahead for Voltas in the dynamic consumer durable and electronics industry?

Written by Nalin Suriya S

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